Morning Report: 24 May 2018

May 24, 2018

GBP. Sterling performed well against a strengthening dollar yesterday, until the release of the Consumer Price Index data which signalled a further slowdown in UK inflation. The CPI release saw inflation continue to cool, with the 2.4% reading being the lowest level in a year. Although this news provides some relief to an economy that has been struggling over recent years with the pace of inflation outstripping average wage earnings, the data does also reduce the necessity of further interest rate hikes in the UK, which reduced appetite for the pound. Retail Sales was released at 09:30 BST, with core Retail sales at 1.3% it came in above forecast of 0.5%, giving sterling fuel to make gains this morning.

USD. Yesterday morning saw a wave of broad dollar strength, extending the greenback’s recent progress even further. Negative releases in both the Eurozone and the UK saw dollar index DXY continue its upward trend. Bellicose rhetoric flew back and forth between US and North Korean officials, causing risk assets and risk-linked currencies to sell off. This gave JPY fuel to be the only G10 currency to make gains against the dollar yesterday. Last night saw the release of the most recent Federal Open Market Committee Meeting Minutes with the prominent development being that the Fed will allow inflation to overshoot the 2% target for a temporary period whilst the economy grows. There was no mention of the pace of their tightening cycle within the minutes, giving no hints to markets about the FOMC’s intentions for near term policy, while reference was made to some officials suggesting a revision of forward guidance was needed soon. As a result, the release was considered relatively dovish, and the US dollar weakened in the overnight session.

EUR. The euro finished the day near the bottom of the G10 currencies against the dollar following further negative data surprises. Weak German Purchasing Managers Index data set the tone, with Manufacturing PMI falling below both forecast (57.9) and April’s release (58.1) to print at 56.8. The Eurozone composite PMI also fell from 55.1 to 54.1, putting further pressure on the euro. The process of Italian Government formation continued last night with President Sergio Mattarella giving Giuseppe Conte, an academic lawyer, the mandate to become Prime Minister. Uncertainty still remains over key positions within the Italian government, with positions such as Finance Minister still to be distributed, and so the euro is likely to remain under pressure in the near term.

CAD. The loonie performed well against USD yesterday compared to most of its G10 peers. Oil prices remained high, while shy of the highs seen at the beginning of the week, and reports emerged that Canadian and Mexican officials are meeting this week in Washington to push for a NAFTA car deal. The push comes as the Trump administration is under a time constraint to ratify a new NAFTA deal before congressional elections, with a deal on auto-production rules being the main sticking point for the 9-month renegotiation. Trump said Wednesday that negotiating NAFTA was proving “very difficult” but autoworkers are going to be “extremely happy with the results”.

FX Elsewhere. The Turkish lira was on something of a roller coaster ride yesterday. The currency first hit new record lows against EUR and USD, before rallying sharply after the Central Bank of the Republic of Turkey decided to increase the late liquidity window interest rate from 13.5% to 16.5% after an emergency meeting. President Recep Erdogan, a fervent opposer of higher interest rates and a main source of pressure for the CBRT, had to bow to the financial markets yesterday in order to avoid the further development of a Turkish currency crisis. He said Turkey will “ abide by the global governance principles on monetary policy”, though he did add that Turkey “will not let global governance principles finish off our country”.

UK news

  • Financial Times: UK tax chief warns Brexit customs option will cost £20bn. Business will face extra bureaucracy costing up to £20bn a year if Britain opts for the “max fac” customs deal with the EU favoured by Brexiters, the head of HM Revenue & Customs has claimed.
  • Reuters: “Italy First”, new PM promises. With a dramatic pledge to be the “defence lawyer of the Italian people”, academic and political novice Giuseppe Conte welcomed last night his appointment as prime minister of a 5-Star-League coalition government in Rome.
  • Bloomberg: U.K. Retail Sales Bounce Back in April as Weather Warms. Up U.K. retail sales rebounded more than expected in April as the spring weather lured shoppers into stores.

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